Britain is drawing up emergency plans for the collapse of the ‘creaking’ Eurozone amid warnings debt-stricken Italy will need a £500 billion bailout involving billions of pounds of UK taxpayers’ money.

Chancellor George Osborne said the Treasury had ‘stepped up’ contingency planning and aimed to be ready for ‘whatever the Eurozone throws at us’.

It emerged yesterday that the International Monetary Fund, in which Britain is a major shareholder, could be forced to offer Italy a €600 billion (£514bn) rescue package to give its unelected new prime minister Mario Monti 12 to 18 months’ breathing room to implement big tax rises and spending cuts.

And in another move, German Chancellor Angela Merkel and French President Nicolas Sarkozy were revealed to be plotting a new pact on economic union without consulting Britain or other countries outside of the EU.

They are determined not to give Britain the chance of insisting on powers being handed back from Brussels by negotiating a major new EU treaty.

Share this article

Share

Germany's original plan was to try to secure agreement among all 27 EU countries for a limited change to the Lisbon Treaty by the end of 2012, making it possible to impose much tighter budget controls over the 17-member Eurozone.

Countries will be forced to submit their budgets for EU approval before they go to national parliaments, will have to sign up to strict new rules on the size of debts and deficits and will be sued for any breach in the European Court of Justice.

Plot: German Chancellor Angela Merkel, left, and French President Nicolas Sarkozy, right, are plotting a new pact on economic union without consulting Britain or other countries outside of the EU

The Franco-German plan will effectively mean an end to national sovereignty over budgets for countries remaining in the euro.

Source said it had become clear to Mrs Merkel and Mr Sarkozy in recent weeks that it appears impossible to get all 27 EU countries on board for the plan.

It could take years to secure the necessary changes, while a rapid loss of market faith in Italy, Spain and even France suggests urgent measures are required within weeks.

EU sources said French and German civil servants have been exploring other ways of achieving the goal, either via an agreement among just the Eurozone countries.

Alternatively, they could strike a separate agreement outside the EU treaty that could involve a core of around just eight to ten Eurozone countries, officials say.

The move will infuriate British Eurosceptics, who have been urging David Cameron to insist on a repatriation of powers for the UK from Brussels in exchange for agreeing to let the Eurozone countries move towards fiscal and political union.

In a sign of the deepening turmoil in the Eurozone, IMF officials were quoted by the Italian newspaper La Stampa as saying a bailout would be needed to give the country a window of 12 to 18 months to implement urgent budget cuts and growth-boosting reforms.

The IMF would guarantee rates of 4.0 per cent or 5.0 perc ent on the loan -- far better than the borrowing costs on commercial debt markets, where the rate on two-year and five-year Italian government bonds has risen above 7.0 per cent.

The size of the loan would make it difficult for the IMF to use its current resources so different options are being explored, including possible joint action with the European Central Bank in which the IMF would act as guarantor. As a major shareholder in the IMF, billions of pounds of British cash would be put on the line under any deal, though it is not clear how much.

Italy’s vast £1.6 trillion national debt and its low growth rate have caused deepening alarm on the international markets in recent weeks, and even a Brussels-inspired ‘coup’ which saw Silvio Berlusconi removed and a government without a single elected politician in it installed failed to stop the rot.

Mr Osborne confirmed yesterday that Britain is preparing for a break-up of the Eurozone that would have cataclysmic effects for the British economy.

‘Well, of course countries like Germany and France have now openly asked the question whether countries like Greece can stay in the Euro. It is a very, very difficult and dangerous situation,’ the Chancellor said.

‘It is having a hugely chilling effect on the British economy at the moment. We have contingency plans for all situations. We have obviously stepped up that contingency planning in recent months. You would expect us to do that as the British government. But that doesn’t mean we are predicting any particular outcome.

‘We’re just ready for whatever the world, whatever the Eurozone throws at us. Adisorderly collapse of the Eurozone would have a massive impact on the UK. I mean, for example, one in seven pounds we export goes to Ireland, Italy, Portugal, Spain and Greece - just those countries.

‘So in other words, it’s a very important part of our economic strategy that we get the Eurozone moving as well.’